Interview with Phileleftheros
Interview with Christine Lagarde, President of the ECB, conducted by Theano Theiopoulou and published on 27 March 2022
26 March 2022
Do you think the European response to Russia's invasion of Ukraine is strong enough?
Let me first express my deep sorrow for the ongoing loss of so many lives as a result of the Russian war against Ukraine. The decisions by EU governments clearly demonstrate their determination to respond to this horrible act of aggression and their solidarity with the people of Ukraine. It is crucial that sanctions are effectively implemented, and the ECB is doing its part. While we don’t have a mandate to assess and enforce banks’ adherence to the different sanction regimes, we are working with the relevant European and national authorities to ensure that banks have clarity on how to apply the sanctions.
While we were about to leave the pandemic behind us, we are now faced with a new crisis because of the war. How much can it harm or delay the economic recovery that was under way globally and what is the risk of having a recession in the euro area if the war drags on?
The war is expected to have a considerable impact on the global economy, and especially on the European economy due to Europe’s proximity to Russia and dependence on Russian gas and oil. It will likely lower euro area growth and push up inflation in the short term through higher energy and commodity prices, confidence effects and the disruption of international trade. Of course, the overall impact will very much depend on how long the war lasts.
Our baseline projections, which include an early assessment of the impact of the war, don’t foresee a recession, given the euro area’s strong labour market and the fading pandemic. The projections see the economy growing at 3.7% this year and 2.8% in 2023. However, given the significant uncertainty, ECB staff have prepared two alternative scenarios: an adverse and a severe one. In the severe scenario, growth could be as low as 2.3% in 2022. But there’s a lot of uncertainty around these estimates.
Is there a risk of stagflation though? Could the euro area economy stagnate?
So far, incoming data don’t point to a material risk of stagflation. The euro area is back to its pre-crisis level of output, growth continues and the labour market remains strong. In the short term, the surge in inflation is due to factors related to the pandemic, stoked more recently by disruptions to global energy prices related to the war.
Prior to the invasion of Ukraine, there were increasing calls in many Member States to raise interest rates and tighten monetary policy to tame inflation. Do you think developments in Ukraine will mean a postponement of such decisions or do higher rates remain possible in 2022?
As you know, our decisions and the path of policy normalisation are entirely data-dependent. Our forward guidance is very clear about the conditions that we need to see before we would consider raising interest rates.
In current conditions, more than ever, we need optionality in our monetary policy. That is clearly reflected in our latest policy decisions in March. We revised the path for net asset purchases and will reduce them step-by-step in the second quarter of this year. We indicated that if the incoming data support the expectation that the medium-term inflation outlook won’t weaken even after the end of net asset purchases, we will conclude net asset purchases in the third quarter. If, on the other hand, the outlook changes and financing conditions deteriorate in a way inconsistent with our two per cent inflation target, we stand ready to revise our schedule for net asset purchases in terms of size and/or duration.
We remain very attentive to the prevailing uncertainties. The calibration of our policies will remain data-dependent and reflect our evolving assessment of the outlook. We will take whatever action is needed to fulfil our mandate to pursue price stability and safeguard financial stability.
How real is the risk that the ECB's worst-case scenario of 7.1% inflation in 2022 will materialise?
This is not the baseline scenario in the ECB’s staff projections. It is also important to stress that, in all our scenarios, inflation is expected to decrease and settle at levels around our two per cent target in 2024.
Was it possible for the ECB to foresee the huge problem of very high energy prices even before Russia's invasion of Ukraine?
Higher energy prices are mostly a result of geopolitical tensions, and you can’t easily foresee the impact of such tensions. We try to cater for the high uncertainty stemming from the current situation, which is why our latest projections were accompanied by the more negative scenarios. Energy prices were also affected by unusual weather conditions, which were also not possible to forecast.
Is it possible to reduce the EU’s dependence on Russian gas, oil and other raw materials in the next few years?
Many European governments are working hard to reduce their dependence on Russian energy, but this takes time. Russia accounts for 22% of euro area energy imports. These can’t be replaced overnight. The euro area is also highly dependent on other Russian raw materials, such as nickel, cobalt and vanadium. Economic dependence on hostile actors is indeed a vulnerability.
Cyprus is heavily dependent on Russian tourism and Russian business. How severe do you think the impact of the war on the Cypriot economy will be?
The war will affect the Cypriot economy through a number of channels. Arrivals from Russia and Ukraine represented as much as 25% of the total, so initiatives by the authorities to substitute and diversify the sources of tourism are the right approach. Also, given the importance of Cyprus as a hub for foreign direct investment to and from Russia, professional services such as accounting, consulting and legal services are also expected to be affected. Finally, the Cypriot economy will be affected by the inflationary pressures from higher energy costs owing to its dependence on oil imports for power generation.
You know very well, however, that every challenge can also be an opportunity. Cyprus is the easternmost and southernmost member of the EU. It offers a European institutional framework, the security of the euro as its currency, and can serve as the hub for business in the Middle East and North Africa region. Your country has demonstrated time and again that it is agile, and that it can cope with difficulties and emerge stronger.
After the 2013 crisis the Cypriot banking system greatly reduced deposits of Russian funds and exposure to the Russian market. How do you assess the way it is handling the turbulence caused by the war? Has the impact of sanctions on banks been more significant in other euro area countries?
The direct exposures of the Cypriot banking sector to the Russian economy are overall rather limited and they continue to decrease. The lost profitability from card transactions or wire transfer fees related to Russian clients is also limited. Indirect effects through tourism are sizeable but can be mitigated by efforts to diversify tourism sources.
Let me also note that important progress has been made over the past few years in stabilising the banking system, improving solvency and liquidity positions and reducing the stock of legacy assets. The Cypriot banking system is better prepared today to withstand the current crisis. The last time I was in your beautiful country, ten years ago, things were looking extremely difficult. But Cyprus is in a totally different position today, having effectively tackled many of the problems it had in the past.
On Thursday RCB Bank announced that it is winding down its business and refunding all deposits. Your comment on that?
This was a business decision and I won’t comment on individual institutions as per our standard policy at the ECB. What is important is that all deposits will be redeemed. In a sense, this decision lifts some of the uncertainty and should enhance confidence in the Cypriot banking sector in the medium term.